JLN Options: Traders Brace for End of Quiet After VIX’s Biggest Drop

Mar 3, 2015

Observations & Insight

OCC Announces Cleared Contract Volume Declined 13% in February
CHICAGO (March 2, 2015) – OCC announced today that total cleared contract volume in February was 306,531,839 contracts, a 13 percent decrease from the February 2014 volume of 350,507,077 contracts. OCC’s year-to-date average daily cleared contract volume is down 9 percent from 2014 with 17,049,163 contracts.
Options: Exchange-listed options volume reached 302,527,974 contracts in February, a 12 percent decrease from February 2014. Equity options volume for the month was 275,262,981 contracts, a 10 percent decrease from February 2014. Average daily options volume this year is down 8 percent from 2014 with 16,815,203 contracts.
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***DA: For those of you keeping score at home, or at the office: It is volume release day, which means the “Exchanges” section is filled with assorted press releases on volume and market share for the dozen U.S. options exchanges.

Lead Stories

Traders Brace for End of Quiet After VIX’s Biggest Drop: Options
by Callie Bost, Bloomberg
Traders in one of the most popular exchange-traded notes tracking volatility are convinced the calm in U.S. stocks won’t last.
Investors added $514 million in February to the iPath S&P 500 VIX Short-Term Futures ETN, known by its ticker symbol VXX, for its biggest monthly inflows since July 2013. The note appreciates as futures on the Chicago Board Options Exchange Volatility Index climb.
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***DA: That would be a pretty good bet, as calm never lasts indefinitely.

USPTO Invalidates CBOE Patents
Press release
The Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office (USPTO) today issued three decisions in response to petitions filed by ISE to invalidate three CBOE patents (US Patent Nos. 7,356,498, 7,980,457 and 8,266,044). The PTAB agreed with ISE and found that all three patents are invalid. These patents formed the basis of litigation that CBOE brought against ISE in the case of Chicago Board Options Exchange, Incorporated v. International Securities Exchange, LLC (Case No. 1:13-cv-01339-JMF), the proceedings in which have been stayed pending the outcome of the PTAB review.
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***DA: A breaking story, or the story that never seems to end.

Russell Indexes Announces Schedule for 2015 Annual Reconstitution
Press Release
Russell today announced the 2015 schedule for its annual reconstitution process, which is designed to capture and reflect global equity market shifts in the past year to ensure that investors continue to have the most accurate proxy for global markets.
“We are excited to embark on another index reconstitution to benefit our clients and investors around the world,” said Rolf Agather, managing director of research and innovation for Russell Indexes. “Annual reconstitution is a critical time for our global indexes and one of the most closely watched market events of the year.”
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***DA: For firms on the bubble, and those up for weighting alterations, this is a rather high-stakes game.

Other Voices: New dawn for Chinese equities as options trading starts
By: SGX Market Updates – Opalesque
China financial reforms could best be summed up in the late leader Deng Xiaoping’s words, “crossing a river by feeling the stones”.
On 9 February, Shanghai Stock Exchange launched China’s first financial options, the SSE50 ETF options.
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***DA: Just in time for the great Chinese slowdown.

India’s VIX Index Falls for Seventh Day as Nifty Rises to Record
by Santanu Chakraborty, Bloomberg
India’s benchmark gauge of options fell for a seventh straight day, its longest losing streak since July, with the most popular puts and calls signaling stocks may move in a range after the federal budget.
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Exchanges

Options Exchange Marketshare
via email from OCC

February 2015 Total Options Marketshare:
AMEX- 8.03%
BATS- 8.20%
BOX- 2.60%
CBOE- 26.34%
C2- 1.87%
GEM- 1.89%
ISE- 9.40%
MIAX- 4.99%
NOBO- 0.56%
NSDQ- 9.23%
NYSE Arca- 9.40%
OMX PHLX- 17.50%

February 2014 Total Options Marketshare:
AMEX- 11.26%
BATS- 3.53%
BOX- 1.72%
CBOE- 29.89%
C2- 1.82%
GEM- 2.53%
ISE- 11.52%
MIAX- 2.36%
NOBO- 0.83%
NSDQ- 8.91%
NYSE Arca- 11.09%
OMX PHLX- 14.53%

February 2015 Equity Options Marketshare:
AMEX- 8.63%
BATS- 9.01%
BOX- 2.86%
CBOE- 19.46%
C2- 2.04%
GEM- 2.08%
ISE- 10.31%
MIAX- 5.49%
NOBO- 0.62%
NSDQ- 10.13%
NYSE Arca- 10.18%
OMX PHLX- 19.20%

February 2014 Equity Options Marketshare:
AMEX- 12.44%
BATS- 3.97%
BOX- 1.93%
CBOE- 21.69%
C2- 2.03%
GEM- 2.84%
ISE- 12.91%
MIAX- 2.65%
NOBO- 0.93%
NSDQ- 10.00%
NYSE Arca- 12.31%
OMX PHLX- 16.30%

ISE Holdings Reports Business Activity for February 2015
ISE Press release
-ISE and ISE Gemini combined represent 12.5% of equity options market share, excluding dividend trades.
-ISE and ISE Gemini reported a combined ADV of 1.8 million contracts.
-Dividend trades made up 1.1% of industry volume in February 2015.
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CBOE Holdings Reports February 2015 Trading Volume
ADV of 4.7 Million Contacts Down 13% vs January
Total Volume of 88.5 Million Contracts Traded
Press release
CBOE Holdings, Inc. (NASDAQ: CBOE) reported today that average daily volume (ADV) during February for options contracts on Chicago Board Options Exchange (CBOE ) and C2 Options Exchange (C2SM) and futures contracts on CBOE Futures Exchange (CFE ) was 4.7 million contracts, a decrease of 22 percent from February 2014 and a decline of 13 percent from January 2015.
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CBOE Futures Exchange Reports February 2015 Trading Volume
CBOE Press Release
– 3.2 Million VIX Futures Contracts Traded
– VIX Futures ADV Down From Year Ago
CHICAGO, March 2, 2015 /PRNewswire/ — CBOE Futures Exchange, LLC (CFE ) today reported that February 2015 monthly average daily volume (ADV) and monthly total volume, both for exchange-wide at CFE and futures on the CBOE Volatility Index (VIX Index), declined from year-ago levels.
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CME Group Volume Averaged 15.8 Million Contracts per Day in February 2015, Up 13 Percent from February 2014
CME Group press release
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that February 2015 volume averaged 15.8 million contracts per day, up 13 percent from February 2014 and representing the all-time highest February average daily volume. Total volume for February 2015 was more than 300 million contracts, of which 87 percent was traded electronically. Options volume in February averaged 2.8 million contracts per day, up 14 percent versus February 2014, with electronic options growing 13 percent over the same period.
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More Countries Able To Apply At Nadex
Darrell Martin, Benzinga
A quick check online Monday morning confirmed that even more countries are now able to utilize trading at Nadex.com. As of 9:30 a.m. EST Monday morning, residents of the following countries are able to apply for membership:
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Regulation & Enforcement

Ontario Securities Commission warns investors about unregulated binary options firm Options Area
By Andrew Saks-McLeod, LeapRate
Ontario’s provincial regulatory authority warns that binary options brand Options Area is not authorized to provide investment services in the Canadian province of Ontario
osc
Ever vigilant Canadian provincial regulator, the Ontario Securities Commission (OSC) has today issued a warning to potential investors relating to a binary options brand which operates under the name of Options Area.
The OSC advises that Options Area Inc. doing business as optionsarea.com, is not registered in Ontario, Canada to engage in the business of trading in securities or advising anyone with respect to investing in, buying or selling securities.
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***DA: Are these safe? Yes or no?

Strategy

How Swaptions Can Reduce Risk in Portfolios
By Kushal Agarwal, Investopedia
Risk management is an important aspect of portfolio management, given the exposure to diverse assets and markets, particularly as the global economy becomes more integrated and extreme events become more common. Portfolio managers for pension funds (in particular defined-benefit funds), insurance companies, and banks have become more reliant on an approach called “asset-liability management.” This view of risk management aims to match the liabilities’ duration with the duration of the assets.
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Why Options Traders Need To Be Mindful Of Skew
Dan Neagoy, See It Market
“Every month is a great month for an Iron Condor!” False. Options income traders frequently want to throw on the same trade every month. Sometimes they make slight adjustments for market conditions or volatility, but the reality is that it’s essential to understand the markets you are trading. And furthermore, the volatility characteristics of different markets can present additional complications that impact the performance of trades. And that’s why understanding options skew is so important.
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Strategy To YieldBoost Heartland Payment Systems From 0.8% To 13.5% Using Options
By StockOptionsChannel.com
Shareholders of Heartland Payment Systems Inc (HPY) looking to boost their income beyond the stock’s 0.8% annualized dividend yield can sell the October covered call at the $50 strike and collect the premium based on the $3.90 bid, which annualizes to an additional 12.7% rate of return against the current stock price (at Stock Options Channel we call this the YieldBoost), for a total of 13.5% annualized rate in the scenario where the stock is not called away.
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Traders Bet Japanese Stocks Will Zoom Higher
Central bank intervention, strong U.S. dollar, and pension fund buying all help to power the rally.
By Steven M. Sears, Barron’s
Japanese equities are becoming a favorite momentum play for international investors.
As the Nikkei 225 index trades around 15-year highs, investors are speculating the rally will continue. This is significant. Historic highs usually prompt investors to buy puts to hedge profits, or position for a market fall.
But Japanese equity trading patterns, at least those in U.S. market, are bullish.
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Should We Be Worried About the VIX Implosion?
Don’t short the market on the CBOE Volatility Index (VIX) dip
by Adam Warner, Schaeffer’s Investment Research
Happy Nazz 5,000, everybody. Do I hear 6,000? 8,000? 10,000?
The TV spent most of the day discussing whether we were in a bubble. The consensus was basically “no.” That’s not to say we actually kept lifting, just that it’s not 2000 again (the year, not the Nasdaq price). I would agree on the non-bubble part, though I find bubble discussions pretty much useless. Is there really some sort of official bubble designation? Does it add any value to an investor? Everyone pretty much knew we sat in a frothy environment in 1999-2000. But it wasn’t all that easy to go short anything and time it well enough to actually make money when we finally dropped. I wouldn’t just go short now, or ever, because of price or some value metric. Overpriced can become very overpriced before it turns. I’d rather miss the top.
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***DA: Bubbles are never spotted in real time; only afterward. One sign, though, is a cacophony of people saying “it’s different this time.” And right now there is no shortage of voices.

Education

Watching Closely Here – Weekly Market Outlook
By Price Headley, CBOE Options Hub
Believe it or not, the S&P 500 (SPX) (SPY) lost ground last week. It was a “just barely” situation, and the Russell 2000 (RUT) (IWM) as well as the NASDAQ Composite (COMP) (QQQ) both ended the week higher even with Friday’s pullbacks. The across-the-board weakness to close out the week, however, is something to think about even if it’s not yet something to worry about.
The odds are weighed below. Let’s first dissect last week’s economic numbers and preview what’s coming up this week.
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Events

CBOE RMC, March 4-6 2015, Carlsbad California
Now in its 31st year in the U.S., the annual CBOE Risk Management Conference (RMC) is the premiere financial industry conference designed for institutional users of equity derivatives and volatility products. Hosted by the Chicago Board Options Exchange (CBOE), RMC is an educational forum dedicated to exploring the latest products, trading strategies and tactics used to manage risk exposure and enhance yields. RMC brings together top traders, strategists and researchers, enabling participants to learn the state-of-the-art in investment risk management from true experts in the field.
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***DA: Starts tomorrow.

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